CMVM - Covid-19: Guidelines for investors

Covid-19: Guidelines for investors

In view of the context of high uncertainty resulting from the Covid-19 pandemic, which makes it difficult to weigh investment alternatives, the CMVM issued a set of guidelines and clarifications addressed to investors that may be consulted on this page.

These guidelines and clarifications add to the supervisory measures taken by the CMVM in the current context in order to protect investors' rights and the integrity of the market wherein they make decisions. These include those related to the duty to provide information to investors by issuers and investment companies, the strengthening of prudential supervision, as well as a set of guidelines and practices focused on the smooth functioning of the capitals market and investor protection. The set of measures adopted by the CMVM is found on the page created for this purpose.

Below are the guidelines that we believe may be most useful for investors, organised as per the following topics:

THE IMPORTANCE OF OPEN MARKETS

Financial markets allow companies access to financing and capital and offer investors alternatives for their savings. It is therefore essential to preserve everyone's confidence in the integrity of the functioning of the markets.

Liquidity and price formation

In view of the impacts of the Covid-19 pandemic, we have insisted on the importance of having quality information in the market which is fundamental for sound price formation as well as the importance of keeping markets open in so that investors are able to continue investing, have access to liquidity and rebalance their portfolios.

We therefore consider it essential that, despite the recent volatility caused by the pandemic, there be no restrictions on access or closure of markets, as this would harm investors, hinder the necessary adjustments in the economy and in the markets and would increase risks for both the financial systems and all investors.

Market trading rules

But if open markets offer advantages, it is also true that in crisis, and in the face of high volatility, it is important to have precautions. This is what happening in Portugal. Trading in securities traded on a regulated market is subject to precautions, which aim to ensure price integrity and investor protection.

In the case of shares admitted to trading on the Portuguese regulated market, Euronext, Euronext Lisbon applies several safety precautions when trading and the system is able to:

reject orders wherein the price or quantity may be considered atypical in view of the trading pattern;
suspend trading in a security if it detects an order that may disrupt the market;
o impose that securities may only be traded within a certain range of price variation which, when attained, results in the automatic and immediate trading suspension.

CMVM's role

The CMVM has ways of intervening in the regulated markets whose primary objective is to ensure investor protection.

In this context, and in addition to monitoring the functioning of market structures ('exchanges', among others,) the CMVM has the possibility of temporarily prohibiting short selling of a financial instrument or set of financial instruments should events that pose a serious threat to financial stability or market confidence occur or in the event of a significant reduction in price(s).

The CMVM is therefore constantly monitoring the performance of investors with short positions in national issuers and the aggregate levels of short positions in each security and in the market in general, depending on their impact on the market and issuers, permanently assessing the opportunity and the consequences of introducing temporary prohibitions on the constitution or reinforcement of short positions on shares traded in the national market, albeit privileging that measures of this nature, when necessary and proportional, are adopted in a coordinated and uniform fashion in an European level.

PRECAUTIONS TO BE TAKEN IN THE FACE OF VOLATILITY

The uncertainty and the potential economic impact of the Covid-19 pandemic brought increased volatility to the financial markets, namely to the share markets.

The volatility reflects the positive and negative variations in the price of securities on the stock exchange, thus reflecting the risk of a share. Normally more risky securities tend to offer higher yields (but more uncertain, given the volatility).

In a crisis situation, there are sometimes volatility peaks which have occurred in the main markets. In view of this situation, you should take some additional precautions:

Avoid constantly re-evaluating your investments and making impulsive decisions

To prevent situations of stress and personal anxiety, you should avoid re-evaluating your investment portfolios on a daily basis and only take decisions according to the evolution of the markets registered on a given day or within short periods. In this way, you will avoid impulsive decision-making and that sometimes are merely based on fear or expectation, which can prove to be unfounded and with negative results.

Don't rush into making investment decisions that don't fit your long-term investment goals

Without rushing, you should evaluate and monitor your investments, namely by making decisions that are appropriate to your investment objectives and risk propensity. This evaluation should be taken into consideration to avoid irrational and hasty decisions that are not in line with your long-term investment objectives.

Review your investment objectives if your financial situation changes

You should take particular precautions and review your investment objectives if your income has changed, or the future prospects for it, and assess potential risks to ensure that your investments are aligned with those objectives, financial capacity and capacity to accommodate devaluations in your investment portfolio.

Be aware of changes in the expected return/risk binomial

Never forget that investment decisions should always be based on an assessment of your risk propensity and the relationship between expected return and risk associated with each asset class. In a situation of market stress, namely, the one that currently exists, the increase in generalised volatility (and, therefore, risk), can change the historical pattern associated with the binomial return and asset risk.

COMMON BEHAVIOURAL BIASES IN TIMES OF TURBULENCE

Investors should, especially in the current context, be mindful in making reflected decisions, seeking to minimise the effects of known hastiness and biases in the context of turbulence and uncertainty in investment decision making.

Share prices tend to reflect investors' perceptions of a company's value. Thus, when more people want to buy a security than they want to sell, the price tends to rise. And vice versa. But because price evolution relies on perceptions, it is a difficult variable to explain. Economic theory studies for example the effects of decisions that are based on emotions or biased perceptions.

There are some types of bias that are more associated with turbulent contexts in the markets:

Loss aversion

Loss aversion reflects a tendency to value losses more than gains. In other words, for investors with a loss aversion, a devaluation of 100 euros in their investments may cost them more than the satisfaction of earning 100 euros.

This means that, even if they recover from losses, and the investment portfolio keeps the value, investors may not regain confidence and satisfaction prior to the turbulent episode. These investors can be particularly sensitive to market moments such as the current one, marked by significant devaluations and high volatility.

One of the risks of this bias is that investors, seeking to avoid risk factors, end up overestimating the risks in their portfolio and change investment strategies, misaligning them with their long-term objectives.

Loss aversion can also result in resistance to bearing losses and selling assets when they are losing value. This option must also be properly considered, as it is sometimes better to assume losses and seek investment alternatives, than to keep assets in the portfolio hampered by certain market situations.

Overconfidence and unjustified pessimism

A behavioural bias also associated with moments of high turbulence is the development of overly optimistic or pessimistic perceptions, which can lead to decisions that are out of line with the real risk levels of the assets and long-term investment objectives.

This type of bias may intensify the bias known as overconfidence (the investor believes that his/her decisions are more accurate than they actually are), leading him/her to take unnecessary risks.

Herd behaviour

In times of great turbulence and uncertainty, it is difficult to assess and understand market movements, thus creating favourable conditions for herd behaviour, where many investors make the same type of decisions, not due to the information and assessment they make of the assets, but simply because the majority are doing so. This effect is very strong in bubbles and market crashes.

Investing or divesting only because others are doing it (bandwagon effect or FOMO - fear of missing out) should be avoided, in order to prevent extemporaneous decision-making that is inadequate to your investor profile, and that lead you, for example, to sell securities at extremely low prices, or during market enthusiasm, to buy excessively expensive securities.

There is another known bias in the markets that may find an opportunity to thrive in today's highly uncertain circumstances. This is the tendency to seek opinions that confirm our viewpoint on the evolution of the market (confirmation bias), underestimating opinions that do not fall within this scope, however well-founded they may be.

RECOMMENDATIONS FOR THE DISTRIBUTION OF DIVIDENDS

Depending on their situation and the market climate and its prospects, issuers may consider revaluing their dividend distribution policy.

The CMVM issued a recommendation for issuers wherein proposals for the distribution of dividends should be weighted, duly justified, clear, accommodated and justified in view of the medium term challenges and risks of each issuer at the present time, and according to its financial capacity to face this moment of high uncertainty.

In this recommendation, the CMVM highlighted the importance of the quality of information to be provided to investors, so that they may, in the context of general meetings, take the decisions that best protect their interests and the medium and long-term interests of the companies they are shareholders of. In particular, with regard to proposals for the distribution of dividends or repurchase of shares, the CMVM recommended that they “be based on high standards of informative quality” and that “in a clear and understandable way, provide shareholders with in-depth knowledge of their rationale and its framework in the face of medium-term challenges posed by current circumstances”.

REMOTE GENERAL MEETING. HOW TO PARTICIPATE?

Considering the constraints caused by the response to the pandemic, particularly concerning social distancing, certain measures were taken regarding the holding of general meetings (GM) of issuers, adjusted to this new reality.

These can be carried out remotely, using telematic means, namely video or teleconference, allowing communication with the participants of that meeting through means of distance communication. They can also be mixed by combining telematic and face-to-face means. In these cases, there may be several possibilities, granting certain participants the physical presence and to others, simultaneous access through means of distance communication, with or without interaction, decentralised or by using common physical places where video access is available for the meeting place.

Information prior to the general meeting

The specific manner in which the meeting is to be held shall be included in the convening notice issued by the issuer, available on the company's official website and on the CMVM website Information Disclosure System;
The means to be used to identify the shareholders, as well as all aspects related to obtaining information or exercising rights in the context of the general meeting, should be defined in the convening notice, as well as the means of contact should, for example, a shareholder need to carry out or clarify any procedure related to his/her participation.

Identifying yourself in order to participate

The general rules remain unchanged. The shareholder must indicate his/her intention to participate in the general meeting to the chair.
At the request of the shareholder, the financial intermediary maintains the duty to communicate to the chair of the general meeting board, the number of shares held by the shareholder.
In these procedures, in the particular context wherein we find ourselves, the use of remote means of communication, in particular the use of electronic mail, should be the most privileged means of distance communication.

In view of the current situation, the maximum deadline for holding general meetings was also modified and extended until 30 June 2020.

TIPS FOR TACKLING INCREASED FRAUD RISK

The CMVM recommends investors to be vigilant of fraud that may arise, particularly digital fraud considering that, in the current circumstances, there are more people on the internet and social networks. In this sense, they should pay attention to:

Fraud associated with "worthy causes"

Situation wherein investment is misleading based on a worthy cause (for example, production of protective equipment in the current health context, aiding health professionals and the most vulnerable classes), and promising high returns.

Fraud associated with market uncertainty and volatility

Using the volatility and apprehension experienced in financial markets, proposals can be made to transfer existing investments to others with higher returns and that seem to be, including risks that are proportionally higher and that do not contain clear information on the instrument and the entity concerned.

Fraud associated with asset transfers

Sending emails, SMS, Whatsapp messages or others, indicating that a fund or financial intermediary wherein you have your investment is in crisis due to the impact of the current pandemic, suggesting and pressing for the transfer of these investments to a new institution.

Safeguard yourself by:

Rejecting offers that appear out of nowhere, unsolicited, be sceptical.
CMVM Carefully analyse ads/proposals on social networks and check if those entities are registered on the CMVM website
Do not open emails or links from unknown sources.
Do not allow yourself to be pressured into taking an investment decision in short period. Ponder beforehand.
If an institution calls you unexpectedly with an offer, ask and use the contact details and name to verify that it is a authentic financial intermediary.
Do not give your personal details (personal, bank, investment details) to people and entities that you do not know.
To clarify any doubts or report a suspicious situation, consult the CMVM website or call the investor support line 800 205 339 (toll free).
See information on Covid-19, namely the measures taken by the CMVM on the page that concerns this subject on our website.

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Covid-19: Guidelines for investors

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